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Thursday, October 18, 2012

ETF Innovation Still Drives Flows

Reported by Tommy Fernandez

There is still a lot of growth in the ETF market, with innovation serving as a primary driver of fund flows, a panel of experts said at the MMI 2012 Fall Solutions Conference. But fund sponsors need to keep focus on client needs, such as exposure product support.

The breakout session, entitled ETFs: Develop or Not Develop, took place Wednesday at the conference held at the Times Square Crowne Plaza Hotel, and was moderated by Benjamin Fulton, managing director of global ETFs at Invesco Powershares Capital Management. It also featured Jill Iacano Mavro, managing director at State Street Global Advisors, Dodd Kittsley, director and global head of ETP research at BlackRock, and Sam Turner, director of large-cap portfolio management at Riverfront Investment Group.

The market is still growing, the panelist said. They cited figures from McKinsey declaring that the market, now under $2 trillion in size, could reach about $4.7 trillion in 2015. They also cited industry figures stating that 50% of the flows each year came from funds launched within the past 12-months.

"Innovation still drives decision making," Fulton said.

ETF launches, while apparently frequent, still don't compare to the activity in the mutual fund space. Mavro cited figures indicating that ETF launches numbered around 226 in the past 12 months, while mutual fund launches reached 580 in the same time period.

As the market has matured, the reasons behind ETF launches have evolved. Being first in the market is no longer the driver it used to be for ETF launches. Years ago, according to Mavro, it mattered. Fitting products to meet the needs of model developers is more important now.

"Years ago, it was really important to be the first to market in certain asset classes. It drove money into popular products," she said. "Now it is more about due diligence."

BlackRock's Kittsley agreed.

"First to market can't hurt, but the benefits have dwindled," he said.

Indeed, Turner said, ETF development is now in its third generation. The first was about getting cheap products out to the market. The second was about developing quick fixes for institutional accounts. Now, it is about developing the right products to address client needs.

Hence, the executives warned against a reliance on developing plain vanilla index products.

"There are some very cookie cutter indexes out there," said Kittsley. "Do they all have merit? Absolutely not."

The pace of evolution is still dependent on the pace of paperwork with the U.S. Securities and Exchange Commission, according to Fulton. Fulton noted that his firm filed to launch an actively managed ETF months before Pimco filed its paperwork. Fulton's firm is still waiting for approval. And it is not just a question of getting exemptions to launch new funds. Regulatory work still needs to be done on issues related to transparency and the kinds of strategies the can be allowed within this template.  

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